UK structural hedges have been a key factor in the UK bank equity story over the last 2 years and look set to remain key drivers of revenue growth in 2026 and 2027. While I intend to write a primer on this in due course, I thought readers might find this spreadsheet modeller (attached below) helpful in thinking about the dynamics.
It’s based on reported company guidance and some baseline assumptions for future swap rates. Readers can play around with those - the main assumptions are labelled in blue - to get a feel for possible outcomes.
Usual health warnings apply, in particular I’d flag two:
For a variety of reasons, some no doubt commercial, the banks don’t give us the disclosure required to accurately model the hedge contribution from one quarter to the next; in an ideal world we need to know individual quarter redemptions and yields on maturing swaps for example. This is particularly an issue for Lloyds where the group materially extended the duration of its structural hedge in 2021 which, as I will explain in a future post, could lead it to have more upside to its structural hedge contribution in 2027 than peers
The future ‘gross’ structural hedge contribution will be dependent to some extent on growth in the size of the hedge. However, readers should keep in mind that adding to the hedge today is a broadly ‘zero sum game’ for Net Interest Income (NII) - with 5 year swap yields close to SONIA rates (c3.75%) - what the bank will make on the fixed leg of the swap will broadly match the floating rate it pays away (but only the former is included in the gross SH contribution).
As ever, would be delighted to hear anyone’s constructive thoughts on the spreadsheet (and any errors you’ve spotted!).
Robin
